This moderate-allocation fund offers exposure to a wide range of asset classes, with experts in each area contributing their best ideas. Boasting a low expense ratio and turnover rate, this one-stop shop is perfect for long-term investors seeking growth and income.
Investors and advisors have long touted the importance of maintaining a diversified portfolio to limit damage from weakness in a particular sector or asset class. Although last year's market turmoil took its toll on even the most well-balanced portfolios--the imminent collapse of the financial system spurred an unprecedented wave of indiscriminate selling--the market's recovery serves as a reminder that diversification still works and cooler heads will prevail.
Take, for example, the fortunes of T. Rowe Price Personal Strategy Income ( PRSIX ). This moderate-allocation fund typically boasts over 1,000 holdings and allocates 30 to 50 percent of its assets to equities, 30 to 50 percent to bonds and 10 to 30 percent to money market funds in an effort to generate income and growth while insulating investors against the market's vicissitudes.
Longtime lead manager Edmund Notzon III serves as the head of T. Rowe's asset allocation committee, which determines the asset mix for this fund, as well as the other offerings that Notzon helms in the Personal Strategy series. This group meets monthly to review and approve the fund's portfolio composition, seeking to identify relatively undervalued asset classes that might warrant an overweight position over the next six to 18 months.
The fund's underlying components include large-cap and small-cap stocks with growth- and value-style allocations among US large-cap equities, developed non-US and emerging-market equities, high-yield and core investment-grade bonds, and non-US dollar-denominated fixed-income securities. Stock selection within these areas devolves to the managers of some of T. Rowe's top mutual funds.
This approach served the fund well up until last year, when upheaval in equities and bond markets resulted in a 20.4 percent loss, by far the worst annual performance in its history.
Despite this substantial loss, the fund's steady outperformance of both its benchmark and its peers places it in the top 15 percent of Morningstar's moderate-allocation category over the past three years and in the top 8 percent over the past 5 years.
And management's asset allocation strategies, coupled with the stock-picking acumen of the sub-advisors, have propelled the fund to a 21.2 percent gain in 2009--better than 19 percent of its competitors. Rather than lick his wounds, Notzon licked his chops in the wake of the market collapse, rebalancing the portfolio and upping the fund's stock holdings from a 3 percent overweight to a 5 percent overweight. As Notzon puts it, "We wanted to have as much equities exposure during the recovery as we did during the decline."
Notzon also credits the sub-advisors, who took full advantage of the opportunities afforded in such a dislocated market. Because prices took a hit across the board, the stock-pickers were able to buy the best companies and sell the worst.
JP Morgan Chase ( JPM ) and Goldman Sachs ( GS ) cracked the fund's top ten equities holdings in April, providing exposure to the rally in financial shares. Along these lines, Bank of America ( BAC ) entered the top ten in June and has stayed there through August. And the fund built substantial positions in technology giants like Google ( GOOG ), Apple ( AAPL ) and Microsoft ( MSFT ) when those stocks were undervalued.
On the income side, a decision to increase exposure to high-yield bonds from a 3.2 percent underweight (relative to its fixed-income benchmark) to a 2 percent overweight has paid off in the recent rally, and Notzon emphasizes that he has absolute trust in Mark Vaselkiv's selections.
The manager of T. Rowe Price High-Yield ( PRHYX ), Vaselkiv "pathologically avoids companies that could go bankrupt or default."
Going forward, Notzon expects the fund to increase its exposure to international markets--one of the reasons behind the fund's slight overweighting of large-cap stocks, which generally offer greater exposure to overseas growth than their small-cap brethren. And the fund is gradually building a 10 percent neutral weighting in emerging-market bonds and non-US dollar-denominated bonds, a process that's roughly half way to completion.
If you're a long-term, retirement-minded investor looking for growth and income, this diversified fund is your one-stop shop for exposure to a broad array of asset classes. And with an expense ratio that's lower than 20 percent of its peers and an investment strategy that limits portfolio churn, you don't have to fret about fees and taxes eating into your returns.